- Fed’s Beige Book expected to show some improvement in the economy
- Markets take J&J vaccine pause in stride
Fed’s Beige Book expected to show some improvement in the economy — Today’s Beige Book report from the Fed is expected to show some improvement in the economy due to the drop-off in Covid infections in March and early-April, which resulted in improved consumer confidence and reduced business restrictions.
The Fed’s last Beige Book report, released on March 3, covered the period from mid-January through the end of February. That was when Covid infection levels were falling sharply. Today’s report will be for March, when Covid infection levels fell to a 5-month low and consumers and businesses started to feel more hopeful about the eventual end of the pandemic.
The March 3 Beige Book showed only a modest improvement in economic activity, but there was some optimism about the future. The Beige Book began by saying, “Economic activity expanded modestly from January to mid-February for most Federal Reserve Districts. Most businesses remain optimistic regarding the next 6-12 months as COVID-19 vaccines become more widely distributed.”
The consensus is for U.S. business activity to soar in Q2 and Q3 as people spend their stimulus checks and as the travel and leisure business starts to improve. The consensus is for U.S. GDP to show strength of +5.4% in Q1 and then to soar by +8.1% in Q2 and +7.0% in Q3. The consensus is for very strong GDP growth of +6.2% for calendar-year 2021, easily overcoming the -3.5% decline seen in 2020. The consensus is then for GDP growth to remain strong at +4.0% in 2022 before tailing off to a more normal +2.4% in 2023.
Fed Chair Powell will speak again today by taking part in a moderated Q&A hosted by the Economic Club of Washington. Mr. Powell today is likely to stay dovish and reiterate his recent themes. Mr. Powell has recently said he continues to see risks for the economy and that the Fed is not close to considering when to start tapering QE or raise interest rates.
In a virtual appearance at an IMF event last Thursday, Mr. Powell said, “the recovery here remains uneven and incomplete,” and that disparate efforts to vaccinate people globally are a risk for the economic rebound.
The markets are not expecting the Fed to start raising interest rates until late 2022 or early 2023. The Eurodollar futures market indicates that the Fed is expecting two or three +25 bp rate hikes in 2023, two rate hikes in 2024, and then about one rate hike per year in 2025 through 2027. That would leave the funds rate up by a total of +250 bp by mid-2028 at around 2.75%. That would be mildly above the FOMC’s current projection of a longer-run fed funds target of 2.5%.
Yesterday’s March CPI report was slightly stronger than expected but had little market impact. The markets generally agree with the Fed that the expected near-term increase in inflation will be temporary and that global disinflationary tendencies remain in effect. However, the current 10-year breakeven rate of 2.33% remains above the Fed’s +2.0% inflation target as the market expects inflation to run a little hot due to the strong economy and bottlenecks.
Yesterday’s March headline CPI was strong at +0.6% m/m and +2.6% y/y, up from Feb’s +0.4% and +1.7% y/y. The strength in the headline CPI was due to a continued rise in retail gasoline prices in the first half of March. The year-on-year figure rose due to the low year-earlier base effect.
The core CPI was more subdued at +0.3% m/m and +1.6% y/y, up from +0.1% and +1.3% in February. However, the core CPI jumped to +1.9% on a 3-month annualized basis from +0.7% in February, illustrating some recent strength in core CPI prices.
Markets take J&J vaccine pause in stride — U.S. stock index futures in overnight trading Monday night fell by about -0.5% on the news that the CDC halted Johnson & Johnson vaccinations to allow further study of suspicions that the vaccine is connected with blood clots in rare cases. However, stocks regained their losses, and the S&P 500 index on Tuesday posted a new record high and closed the day up +0.30%.
U.S. health officials suggested that the J&J vaccine pause would be relatively short and that the U.S. can keep up the recent vaccination rate with supplies from Moderna and Pfizer. According to the CDC, the U.S. has administered 7.3 million doses of the J&J vaccine, which is only 3.8% of the total 192.3 million U.S. vaccine doses administered. There have been 99.5 million Pfizer doses administered and 85.4 million Moderna doses administered.
Of the total U.S. population, 22.7% have now been fully vaccinated, and 36.8% have received at least one dose, according to the CDC’s Covid Data Tracker. Almost two-thirds of the U.S. population of 65 and over has now been fully vaccinated, which is a key factor in dampening the Covid death rate. In the past week, an average of 3.38 million vaccine doses per day were administered, according to Bloomberg’s Vaccine Tracker, which means 1.0% of the U.S. population is being vaccinated every day.
The bad news is that 7-day average of new daily U.S. Covid infections on Monday rose to a new 1-3/4 month high of 70,003, up from the 6-month low of 51,820 posted in mid-March. The Covid infection rate has recently been on the rise due to the spread of variants, reduced restrictions, and increased travel.
